EU Referendum: Investors should be wary of the polls

How should investors prepare for Britain’s referendum on EU membership? Shares were weak ahead of the Scottish referendum and the UK general election, but ultimately it proved right to ignore the opinion polls. Polls can capture a lot of biases and wishful thinking, whereas voting often concentrates the mind. In the polling booth, fear of the unknown can be the strongest emotion.

Investors who ignore polls but track the betting are less likely to be unnerved in the coming weeks. Betting odds were a much better guide to the Scottish referendum and UK general election results. Insofar as betting odds represent a poll of polls – weighting all the information according to the bookies’ assessment of credibility – the numbers are less volatile.

Already, many portfolios have been affected by the fall in the value of the pound. The currency is now at a seven-year low versus the US Dollar and the lowest since 2014 against the Euro. But, there is the potential of worse to come for the stock market if the result is for British exit. Should Brexit happen, there does seem to be agreement on the potential for a few years of weaker growth in the UK. Politics also could be in turmoil, and negotiations will take time.

Even the vagaries of the polls ahead of the vote could unsettle shares. Can investors separate out the risks from their own emotions and voting intentions? For confident investors, the weakness was a buying opportunity – it proved right to ignore the opinion polls. Domestic investors are often better placed to get this right. Typically, international investors are more fearful of being on the wrong side of a nation’s politics, and focus excessively on headlines and polls.

In the early stages, whether longer term prospects are better or not, will not be what matters for the stock market. Those who believe exit will happen are likely to be repositioning their assets more cautiously.

What even the politicians and economists do not know, is whether a British exit would trigger a crisis. British exit could be a catalyst for change within the EU itself, which is a work in progress. Currently, political union, banking union and monetary union are in their early stages. Opposition politicians in Europe’s periphery could see exit as an easier option.

For some, Europe is a straight-jacket forcing austerity, with the euro a modern-day gold standard restricting growth.

And, any break-up within the UK itself would become an internal matter for Britain rather than a direct concern for the EU. The question of Scottish independence would move from the potential to impact on an EU member, to one of considering Scotland as a new admission. While the UK is in the EU, any secession could encourage other splinter groups. The question of re-admitting Scotland would not create the same risk.

Irrespective of whether another “once-in-a-lifetime” Scottish referendum could be held, Brexit would be likely to trigger speculation on the future of the UK.

Investors need robust strategies and diversification of assets in order to avoid short -term panic. Assets overseas would be revalued in sterling terms, providing some offset in internationally diversified portfolios.

A devaluation often boosts growth and inflation, and so could improve UK growth. Many British companies – particularly the largest ones – have a broad spread of global interests. And even cash might do better, if Britain’s drift into negative deposit rates is deferred. A broadly-spread portfolio will have winners and losers.

Politicians will play on fears in the coming weeks. Investors should try to stop this disrupting their long-term strategy. In the lead-up to June 23, there will be opportunities as well as risks.

A version of this article was published in Personal Finance in The Herald on April 2nd 2016.

Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. The information presented in this article has been obtained from sources believed to be reliable, however, I make no representation as to their accuracy or completeness and accepts no liability for loss arising from the use of the material. Articles and information do not represent investment advice.

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